Knight glitch likely to lead to regulatory changes

NEW YORK: The August 1 trading glitch that punched a US$440 million hole in Knight Capital Group Inc's
balance sheet and nearly sank the firm will likely prompt a review of
the rules that govern electronic trading, Knight's chief executive said
on Tuesday.
The U.S. Securities and Exchange Commission will
likely reexamine rules on how errors are dealt with by trading firms
and exchanges, as well as the circuit breakers that are tripped by
unusual volume and so-called "kill switches," which could shut down
order flow, Knight CEO Thomas Joyce said.
Two
days after Knight's near fatal trading glitch, the SEC said it would
host a discussion with industry players and experts on October 2 that
would look at how to prevent and handle technical glitches.
"The
silver lining is that, at the end of the day, I believe some regulatory
changes will be made and there are probably only two or three of them
that need to be considered, but it will make the system stronger,"
Joyce said at the Barclays Global Financial Services Conference in New
York.
On August 1, Knight, one of the two biggest executors of
stock trades in the United States, went live with new software that had
been improperly installed and conflicted with old code that was
supposed to have been deleted, unleashing a flood of orders to the New
York Stock Exchange, unrestricted by volume caps.
"In effect, we kicked the beehive," Joyce said.
As orders accumulated, exchange operator NYSE Euronext was "hamstrung" by SEC rules that prevented it from breaking trades that did not fall under specific circumstances, Joyce said.
"There
is no reason to put a firm at risk because some knucklehead, or a
series of knuckleheads at the firm, made a big mistake. If it's an
error, you should be able to fix an error," he said.
THIRD-PARTY REVIEW
The SEC has been grappling with a number of technology mishaps recently.
Nasdaq OMX Group is under investigation by the agency for its botched handling of Facebook Inc's
May 18 initial public offering. Also earlier this year, BATS Global
Markets suffered a technology glitch that led it to pull its own IPO on
its own exchange.
Knight is conducting an internal review of the glitch and has hired International Business Machines Corp to do a third-party review of its product development lifecycle processes. IBM will report its findings to Knight's board of directors in the autumn, Joyce said.
Knight
also plans to hire a new chief risk officer, who will have
responsibility for market risk, credit risk and operational risk.
Prior
to the glitch, Joyce said his biggest concern was the effect possible
regulatory reforms would have on Knight, which is a key player in
high-speed electronic trading.
"It is clear that at the pace we
all operate, I was mistaken, regulatory risk was not our biggest issue,
operational risk was and we unfortunately proved it."
DEEP THINKING
Knight
is one of the largest executors of stock trades in the United States.
Joyce said volumes at Knight had largely returned to pre-glitch levels.
That is due in part to the firms that stepped in to save Knight with a
$400 million investment to keep it afloat just days after the mishap.
The investors included Blackstone Group LP , Getco and financial services companies TD Ameritrade Holding Corp , Stifel Nicolas , Jefferies Group Inc and Stephens Inc.
Discount
brokerage TD Ameritrade was a major customer of Knight before the
investment and now "there may be an order routing agreement" between
the two firms, CEO Fred Tomczyk said at the Barclays Conference, without elaborating.
Tomczyk was recently appointed to Knight's board of directors along with Blackstone managing director Martin Brand and General Atlantic's advisory director Matthew Nimetz.
As
of August 31, Knight had about $510 million in cash and more than $200
million in excess of its regulatory capital requirements, Joyce said.
Now
that the firm is in better shape, management and the reconfigured board
will begin a strategic review of Knight's business units, Joyce said.
"There
will be, I believe, some deep thinking going into the strategy and
hopefully the net outcome will be a more optimized organization going
forward." - Reuters